I have two decades of experience trading currencies and fixed income instruments. My market analysis skills were honed during my tenure as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006 as Chief Currency Analyst, I have been publishing a daily commentary on global markets. I lead a team with 24/7 North America, Asia and Europe forex market coverage. Born in Dublin, Ireland, I hold a degree in Economics and Finance from Trinity College Dublin.

A 'Yen' For Your Thoughts

This Wednesday’s forex news winner has been the Japanese yen. The currency has managed to go ‘down’ in style this morning. It fell to a fresh 32-month low against the dollar and nearly a three-year low against the EUR, following the Bank of Japan (BoJ) Governor Masaaki Shirakawa’s decision to leave his post a tad earlier than presumed. However, it was probably the implication that he was pushed by the government that drove the yen to establish such an early low.

Governor Shirakawa has indicated that he will step down on March 19, three weeks earlier than scheduled. Prime Minister Shinzo Abe’s government is expected to choose a governor with a dovish tint. This would allow the individual to be more ‘amenable to the government’s plans for aggressive monetary easing to stimulate the Japanese economy.’ Abe is expected to present his candidate for the governorship to the opposition parties after a visit to the U.S. this month.

Japanese Vice-Finance Minister Shunichi Yamaguchi has so far indicated that the BoJ’s policy tools are sufficient for now, suggesting no quick push for the foreign bond purchases previously suggested by the ruling party. This is certainly an idea that many of Japan’s G10 cohorts will not be happy with. Proactively weakening one’s owns currency could be seen as being too aggressive, a line drawn in the sand ahead of a ‘currency war.’

European Questions Remain Not as hot a topic but equally noteworthy is the Spanish and Italian bond yields that are edging higher in the European session at the open. It seems that investors remain concerned about further political fallout from both of these countries. We are now talking about the political stability of two of the most dominant of the Eurozone periphery countries. This has certainly put the long EUR bulls on high alert again so far this morning.

The dominant question being pondered by the market ahead of the European Central Bank (ECB) meeting on Thursday is whether the current EUR value is too high. The market is certainly hearing from the euro exports corner, but what can ECB chief Mario Draghi do or say, if anything, to walk the currency value lower? Will he mention the currency directly? When asked about currencies, he usually sticks to a tried and true G20 statement like at the last meeting. Phrases that frankly indicate that the single unit is too strong are unlikely to be used. However, statements on the development of the euro exchange rate and the effects on growth and inflation cannot be excluded. If he wants to push the EUR significantly lower, just mention the Spanish problems and how they make one so nervous. But they are a conservative bunch at the ECB and not the swiftest in making changes. Draghi may say that the current EUR value reflects confidence in the Eurozone. This is the region’s “get-out-of-jail card.”

Modest Economic Improvement Noted The KOF Swiss business situation index rose to its highest level in 10 months this morning, with most companies surveyed (6,000) reporting a “substantial improvement in their situation.” It seems that companies are content with the 2013 trend thus far, and do not plan to be cutting too many jobs. Even the EUR/CHF (1.24) crate of late has had a minimal impact on business sentiment. Machinery companies plan to boost production and are less likely to cut staff. That stands in contrast to the financial industry, where, despite being optimistic, are planning some large global staff cutting (e.g. UBS cut 10,000 employees).

So far we have witnessed better than expected Purchasing Managers Index (PMI) levels and rising commodity prices. Combined, both would suggest a “continuing acceleration in global industrial production momentum.” That said, the forex market remains an assortment of peculiar stories rather than a high correlation of “risk-on” trade. Under normal circumstances, signs of improving growth would serve to bolster the EUR, while via higher core-yields, it would hurt the JPY. It’s similar to how the recent dovish statements from the Reserve Bank of Australia hurt the AUD despite better global growth. These are some of the 2013 trends that are expected to continue in the short-term.

Markets are beginning to look overbought again as bullish opinion about the ‘single unit’ has been called into question. Any investor that happened to miss the most recent EUR uptick is expected to sit on the sidelines and patiently wait for another opportunity. The speed at which new cracks are appearing in the Eurozone, perhaps this waiting period may not be that long.

With U.S. Treasury yields on the rise and a speculative market short on dollars, this is a combination that should suit the “big dollar” bull. Tomorrow’s ECB meeting and a Spanish bond auction is beginning to suppress traders to take on new positions. EUR leakage to the left-hand side cannot be ruled out. The best bet is to witness further consolidation between 1.35-1.36. Larger vanilla options at 1.35, 1.3530 and 1.36, should keep the range-bound interesting.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

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